Question 1

Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at the balance sheet date and those that came into being after the end of the year.The subsequent information should NOT be incorporated directly into the statements if the conditions causing the change in valuation:
A) did not take place until after year-end.
B) took place before year-end.
C) occurred both before and after year-end.
D) are reimbursable through insurance policies.

Accepted Answer

Subsequent information that arises after year-end should not be incorporated directly into the financial statements unless the conditions causing the change in valuation existed at the balance sheet date. If the conditions came into existence after year-end, adding them to prior financial statements would not be appropriate. Therefore, choice A is the correct answer. B and C are incorrect because in both cases, the conditions existed at or before year-end. D is irrelevant because it does not relate to the timing of events.

Question 2

Management furnishes the independent auditor with information concerning litigation, claims, and assessments.Which of the following is the auditor's primary means of initiating action to corroborate such information?
A) Request that client lawyers provide a legal opinion concerning the policies and procedures adopted by management to identify, evaluate, and account for litigation, claims, and assessments.
B) Request that client management engage outside legal counsel to suggest wording for the text of a footnote explaining the nature and probable outcome of existing litigation, claims, and assessments.
C) Request that client lawyers undertake a reconsideration of matters of litigation, claims, and assessments with which they were consulted during the period under examination.
D) Request that client management send a letter of general inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments.

Accepted Answer

The auditor should request that client management send a letter of general inquiry to those lawyers with whom management consulted concerning litigation, claims, and assessments. This is the primary means for initiating action to corroborate such information, as it allows the auditor to obtain direct and independent confirmation from the lawyers who are knowledgeable about the legal matters in question. The other choices are not as effective because they either rely on management or outside legal counsel for corroboration, or they do not involve direct communication with the relevant legal experts.

Question 3

A client has a calendar year-end.Listed below are four events that occurred after 31 December.Which one of these subsequent events might result in adjustment of the 31 December financial statements?
A) settlement of a litigation for a different amount from that recorded in the accounts
B) adoption of accelerated depreciation methods
C) collection of 90% of the accounts receivable existing at 31 December
D) sale of a major subsidiary

Accepted Answer

Settlement of a litigation for a different amount from that recorded in the accounts is a subsequent event that might result in adjustment of the 31 December financial statements as it affects the accuracy of the financial statements. The settlement amount might differ from the amount recorded initially, leading to changes in the financial statements. The other events above may not result in the adjustment of the 31 December financial statements.

Question 4

Which type of subsequent event requires consideration by management and evaluation by the auditor?
A) subsequent events that have no direct effect on the financial statements but for which disclosure is advisable
B) subsequent events that have a direct effect on the financial statements and require adjustment
C) both A and B
D) none of the above

Accepted Answer

Management is responsible for identifying and evaluating subsequent events that have occurred after the balance sheet date but before the financial statements are issued. The auditor should evaluate management's assessment of such events and determine if they have a direct effect on the financial statements (requiring adjustment) or no direct effect (but requiring disclosure). Therefore, both types of subsequent events require consideration by management and evaluation by the auditor.

Question 5

Harvey, CPA, is preparing an audit program for the purpose of ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation of the financial statements in conformity with applicable accounting standards.Which one of the following procedures would be LEAST appropriate for this purpose?
A) Confirm, as of the completion of fieldwork, accounts receivable that have increased significantly from the year-end date.
B) Inquire of management concerning events that may have occurred.
C) Read the minutes of the board of directors meetings.
D) Obtain a legal counsel's letter as of the completion of fieldwork.

Accepted Answer

Confirming accounts receivable that have increased significantly from the year-end date is a test of details procedure, not a subsequent events procedure. The other options listed (inquiring of management, reading board of directors meetings, obtaining a legal counsel's letter) are all appropriate procedures for identifying subsequent events.

Question 6

Which one of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?
A) major purchase of a business that is expected to double the sales volume
B) settlement of litigation in excess of the recorded liability
C) sale of long-term debt or capital stock
D) loss of a plant as a result of a flood

Accepted Answer

The settlement of litigation in excess of the recorded liability would require an adjustment to the financial statements before they could be issued. This is because the recorded liability would need to be increased to reflect the actual amount paid in the settlement. The other events listed may require disclosure in the footnotes to the financial statements, but would not require an adjustment to the financial statements themselves.

Question 7

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be:
A) neither reported nor disclosed in footnotes.
B) disclosed in the auditor's report but not disclosed on the financial statements.
C) disclosed in footnotes but not accrued.
D) included in the financial statements as an actual liability.

Accepted Answer

If a contingent liability meets the criteria of being probable and the loss amount can be reasonably estimated, it must be recognized as an actual liability in the financial statements. Disclosing in footnotes is not enough and not accruing the liability is also not appropriate. Therefore, choice D is the best option.

Question 8

If the response from the client's legal representative contains a disagreement with management, the auditor should:
A) seek resolution through discussion with management and the lawyer.
B) confirm the information using alternative audit procedures.
C) issue a qualified audit report.
D) seek resolution with management.

Accepted Answer

It is important for the auditor to seek resolution through discussion with both management and legal representative in order to understand the disagreement and any potential implications for the audit opinion. This allows the auditor to make an informed decision and potentially avoid issuing a qualified opinion. Confirming the information using alternative audit procedures would also be appropriate, but it should not be the only course of action taken by the auditor. Issuing a qualified opinion should be a last resort after all other options have been exhausted.

Question 9

An auditor performs interim work at various times throughout the year.The auditor's subsequent events work should be extended to the date of:
A) a postdated footnote.
B) the final billing for audit services rendered.
C) the auditor's report.
D) the next scheduled interim visit.

Accepted Answer

The auditor's subsequent events work should be extended to the date of the auditor's report since this is the date when the auditor expresses their opinion on the financial statements. The other options are not relevant in determining the extent of subsequent events work.

Question 10

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012.Which one would require an adjustment to the account balances as at 30 June 2012?
A) Unused equipment recorded at $100 000 at 30 June, 2012 was disposed of on 3 July 2012 for $60 000.
B) Inventory valued at $100 000 on 30 June 2012 was destroyed by a fire on 1 August 2012.
C) The client disposed of a major subsidiary on 30 July 2012.
D) The auditee will market $2 million of preference shares on 31 July 2012.

Accepted Answer

The disposal of unused equipment after the balance sheet date results in a change in the value of the assets at 30 June 2012. Therefore, an adjustment is required to reflect the decrease in the value of the asset. The other three events occurred after the audit date and have no effect on the account balances as at 30 June 2012.

Question 11

During the final review of working papers and financial statements, it is common to have the analytical procedures done by a:
A) partner.
B) senior.
C) junior staff member.
D) manager.

Accepted Answer

The answer of During the final review of working papers...

Question 12

The audit procedures for the subsequent events review can be divided into two categories: (1)procedures normally integrated as a part of the verification of year-end account balances and (2)those performed specifically for the purpose of discovering subsequent events.Which one of the following procedures is in the first category?
A) Review journals and ledgers of year 2 to determine the existence of any transaction related to year 1.
B) Obtain a management representation letter written by the client.
C) Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate.
D) Inquire of the client regarding contingent liabilities.

Accepted Answer

C) Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate. This procedure is typically integrated as part of the verification of year-end account balances to ensure transactions are recorded in the correct accounting period.

Question 13

An auditor's decision concerning whether or not to 'dual date' the audit report is based upon the auditor's willingness to:
A) extend auditing procedures.
B) permit inclusion of a footnote captioned event (unaudited) subsequent to the date of the auditor's report.
C) assume responsibility for events subsequent to the issuance of the auditor's report.
D) accept responsibility for subsequent events.

Accepted Answer

Dual dating is used when an auditor is willing to extend auditing procedures for a specific event that occurs after the original audit report date, without extending responsibility for other subsequent events.

Question 14

Which event that occurred after the end of the financial year under audit but prior to issuance of the auditor's report would NOT require disclosure in the financial statements?
A) a major drop in the quoted market price of the shares of the corporation
B) loss of plant or inventories as a result of fire or flood
C) settlement of litigation when the event giving rise to the claim took place after the balance sheet date
D) sale of a bond or share issue

Accepted Answer

A major drop in the quoted market price of the shares is considered a non-adjusting event as it reflects conditions that arose after the balance sheet date and does not require disclosure in the financial statements.

Question 15

The auditor's responsibility for 'reviewing the subsequent events' of a client is normally limited to the period of time beginning with the:
A) start of the financial year under audit and ending with the balance sheet date.
B) balance sheet date and ending with the date of the annual general meeting.
C) start of the financial year under audit and ending with the date of the auditor's report.
D) balance sheet date and ending with the date of the auditor's report.

Accepted Answer

The auditor's responsibility for reviewing the subsequent events is from the balance sheet date until the date of the auditor's report. This is because the auditor is responsible for providing an opinion on the financial statements as of the balance sheet date, and any events occurring after that can impact the financial statements and require disclosure in the footnotes or adjustments to the financial statements. The date of the auditor's report represents the date when the auditor completed their work and is deemed the end of the audit period.

Question 16

The statement that BEST expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is that the:
A) auditor is responsible for determining that a proper cutoff has been made and performing a general review of events occurring in the subsequent period.
B) auditor is fully responsible for events occurring in the subsequent period and should extend all detailed procedures through the last day of fieldwork.
C) auditor's responsibility is to determine that a proper cutoff has been made and that transactions recorded on or before the balance sheet date actually occurred.
D) auditor has no responsibility for events occurring in the subsequent period unless these events affect transactions recorded on or before the balance sheet date.

Accepted Answer

The auditor's responsibility includes ensuring a proper cutoff of transactions around the balance sheet date and reviewing significant events in the subsequent period that may affect the financial statements.

Question 17

The audit procedures for the subsequent events review can be divided into two categories: (1)procedures normally integrated as a part of the verification of year-end account balances and (2)those performed specifically for the purpose of discovering subsequent events.Which of the following procedures is in the second category?
A) Compare the subsequent-period purchase price of inventory with the recorded cost as a test of lower-of-cost-or-market valuation.
B) Test the collectability of accounts receivable by reviewing subsequent period cash receipts.
C) Examine subsequent period sales and purchases transactions to determine whether the cutoff is accurate.
D) Correspond with legal counsel.

Accepted Answer

Corresponding with legal counsel would fall under the category of audit procedures performed specifically for the purpose of discovering subsequent events. Legal counsel may be able to provide information on pending litigation or other legal matters that could affect the financial statements. Choices A, B, and C are procedures that are typically integrated as a part of the verification of year-end account balances and would not necessarily reveal subsequent events.

Question 18

A specific letter of inquiry to the client's external legal counsel would include:
A) management's assessment of the outcome of each identified litigation.
B) a list of litigation and claims.
C) a request from the client's external legal counsel confirming the reasonableness of management's assessment of the outcome of each identified litigation.
D) all of the above

Accepted Answer

A specific letter of inquiry to the client's external legal counsel typically includes management's assessment of the outcome of each identified litigation, a list of litigation and claims, and a request for the external legal counsel to confirm the reasonableness of management's assessments. This comprehensive approach ensures that the auditor has a full understanding of potential legal liabilities.

Question 19

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012.Which one would NOT require an adjustment to the account balances as at 30 June 2012?
A) Uninsured inventory valued at $100 000 on 30 June 2012 was destroyed in a fire on 5 July 2012.
B) Investments recorded at cost ($100 000) were sold on 2 July 2012 for $60 000.
C) A contingent liability disclosed in the notes at an estimated amount of $100 000 was settled out of court on 15 July 2012 for $125 000.
D) A customer declared bankruptcy on 31 July 2012.

Accepted Answer

Events that occur after the balance sheet date but before the audit report is issued are only required to be adjusted if they provide additional information about conditions that existed at the balance sheet date. The destruction of inventory in a fire after the balance sheet date does not reflect the conditions of the inventory at the balance sheet date and is considered a non-adjusting event.

Question 20

The auditor has a responsibility to review transactions and activities occurring after the balance sheet date to determine whether anything occurred that might affect the valuation or disclosure of the statements being audited.The auditing procedures required to verify these transactions are commonly referred to as the review for:
A) late unusual occurrences.
B) subsequent events.
C) contingent liabilities.
D) subsequent years' transactions.

Accepted Answer

Subsequent events are transactions and activities occurring after the balance sheet date but before the audit report is issued. The auditor has a responsibility to review these events to determine whether they need to be disclosed or require adjustment of the financial statements.

Quiz 17: Completing the audit

Management furnishes the independent auditor with information concerning litigation, claims, and assessments.Which of the following is the auditor's primary means of initiating action to corroborate such information?

A client has a calendar year-end.Listed below are four events that occurred after 31 December.Which one of these subsequent events might result in adjustment of the 31 December financial statements?

Which type of subsequent event requires consideration by management and evaluation by the auditor?

Which one of the following material events occurring subsequent to the balance sheet date would require an adjustment to the financial statements before they could be issued?

If a potential loss on a contingent liability is probable and amount of the loss can be reasonably estimated, the liability should be:

If the response from the client's legal representative contains a disagreement with management, the auditor should:

An auditor performs interim work at various times throughout the year.The auditor's subsequent events work should be extended to the date of:

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012.Which one would require an adjustment to the account balances as at 30 June 2012?

During the final review of working papers and financial statements, it is common to have the analytical procedures done by a:

An auditor's decision concerning whether or not to 'dual date' the audit report is based upon the auditor's willingness to:

Which event that occurred after the end of the financial year under audit but prior to issuance of the auditor's report would NOT require disclosure in the financial statements?

The auditor's responsibility for 'reviewing the subsequent events' of a client is normally limited to the period of time beginning with the:

The statement that BEST expresses the auditor's responsibility with respect to events occurring between the balance sheet date and the end of the audit examination is that the:

A specific letter of inquiry to the client's external legal counsel would include:

The following events all occurred after the balance sheet date of 30 June 2012, but prior to the date of the audit report, 15 August 2012.Which one would NOT require an adjustment to the account balances as at 30 June 2012?